AIG 2011 Annual Report Download - page 73

In the near term, challenges in the global economy, including the European sovereign debt crisis, political
uncertainty in the Middle East, and sustained higher fuel prices have negatively impacted many airlines’
profitability, cash flows and liquidity, and increased the probability that some, including ones that are ILFC
customers, will cease operations or file for bankruptcy. During the year ended December 31, 2011, ILFC had
seven of its lessees cease operations or file for bankruptcy (or its equivalent) and return nine of its aircraft. Since
December 31, 2011, ILFC has had four additional lessees cease operations or file for bankruptcy (or its
equivalent) and return 42 of its aircraft. Of these aircraft, 17 remain to be re-leased as of February 21, 2012.
Future events, including a prolonged recession, ongoing uncertainty regarding the European sovereign debt crisis,
political unrest, continued weak consumer demand, high fuel prices, or restricted availability of credit to the
aviation industry could lead to the weakening or cessation of operations of additional airlines, which in turn would
adversely affect ILFC’s earnings and cash flows.
On September 2, 2011, ILFC Holdings, Inc., an indirect wholly-owned subsidiary of AIG, which is intended to
become a holding company for ILFC, filed a registration statement on Form S-1 with the SEC for a proposed
initial public offering. The number of shares to be offered, price range and timing for any offering have not been
determined. The timing of any offering will depend on market conditions and no assurance can be given regarding
the terms of any offering or that an offering will be completed.
Other Operations
Mortgage Guaranty
UGC has continued its strategy of differentiating itself from its competitors through its risk-based pricing
approach and has emerged as a leading producer of new mortgage insurance business. UGC believes its
differentiated pricing and underwriting practices have helped establish it as a leader in the industry. During 2011,
UGC has significantly increased new insurance written over 2010 levels while improving the risk profile of its in
force book of business. The mortgage insurance industry, however, has come under continued financial stress
during 2011 due to the continued poor macroeconomic conditions with some mortgage insurers exceeding their
respective regulatory capital leverage ratios. As a result, two of these insurers have ceased selling new insurance
and the parent of one of these insurers was placed into bankruptcy. The withdrawal of these competitors from the
market combined with the differentiation strategy that UGC implemented in late 2010 and early 2011 has
positioned the company to take advantage of market opportunities. UGC plans to continue this strategy during
2012 with continuing improvements in market share and continued improvement in the risk profile of new
business written.
In older books of business, primarily the 2005 to 2008 books, newly reported delinquencies declined while
increased claims severity and overturns on previously denied claims unfavorably affected results. UGC continued
to deny claims and rescind coverage on loans (collectively referred to as rescissions) related to fraudulent or
undocumented claims, underwriting guideline violations and other deviations from contractual terms, mostly with
respect to the 2006 and 2007 vintage books of business. These policy violations resulted in loan rescissions totaling
$746 million of claims on first-lien business during 2011 compared to $781 million during 2010. Although
rescissions will continue to have a positive effect on UGC’s financial results, higher levels of appeals and overturns
resulting from additional resources deployed by lenders and mortgage servicers to address loan documentation
issues have offset rescissions. During 2011 rescissions totaling $411 million of risk were overturned compared to
$172 million in 2010. While these items may increase volatility in the future, UGC believes it has provided
appropriate reserves for currently delinquent loans after consideration of rescissions and overturns, consistent with
industry practice. Additionally, during 2011, UGC changed its follow up practice for loans that had been
delinquent approximately 24 months or more and were not expected to be cured. Beginning in the third quarter of
2011, UGC contacted lenders regarding 18,000 loans or approximately 19 percent of the delinquent inventory and
requested that, in accordance with the terms of the respective master policies, the lender file a claim. By the end
of 2011, UGC had received responses to approximately half of the requests. UGC continues to monitor and
review the status of these requests as well as contacting lenders on an ongoing basis about additional
delinquencies that meet these criteria. Under these master policies, if a claim is not submitted within a year of
UGC’s request, coverage will be cancelled.
AIG 2011 Form 10-K 59